February 12, 2009
A battle is on in the world of economics, a battle that can be symbolized as David vs. Goliath. It is the intellectual and tactical battle between big government and small government. Goliath is big government whether it is headed by George Bush or Barack Obama, the new president who promised change but is promoting the business of big government as usual. David is small government, currently being represented by Ron Paul, the Constitutionalist Congressman from the House Financial Services Committee, who thinks big government is the problem, not the solution. The most recent battleground is the economic stimulus package newly emerged from the shoot of big government.
The basic premise of Goliath is that to keep the current economic malaise from rivaling or exceeding the scope of the Great Depression, the government must stimulate the economy with massive amounts of money so consumers can get loans to continue their binge of accumulating material goods. Even though too many people already have a house they can’t afford, a new car, bulging closets, spoiled children, and debt up to their eyeballs, Goliath sees the current crisis as the result of the drying up of credit and the refusal of lenders to lend. This vision is like telling a man who has just finished a seven course dinner that the only way around his indigestion is to eat another meal.
David thinks that in order to keep the current economic crisis from turning into a prolonged depression as was witnessed in 1929, the government must retrench and let the invisible hand of the market cleanse away the debt overhang before any real economic growth can again take place and the economy can right itself. David thinks the man who just finished the seven course dinner should take a digestive enzyme, lie down and sleep it off.
Understanding the source of the crisis is the first step to solving it
The small government proponents believe the way to start improving the situation is to first understand how we got into such a mess. They see the cause of the current distress as the result of government policies and central planning that created the housing bubble that is now going bust.
About a decade ago, the government made expanded homeownership and affordable housing a public goal. Through Fannie Mae, Freddie Mac, and the secondary mortgage market, the government provided the incentive for low down-payment, widely available mortgage products. It discouraged market-proven lending standards so successfully used in the past. The Federal Reserve, kept interest rates artificially low, adding even more fuel to this fire. Many sectors related to the housing bubble flourished because of this environment of easy credit, and many people were put into homes they otherwise could never have afforded.
It was a festive time for a lot of people. The government-spurred increased demand for housing sent prices soaring until many markets became unaffordable, necessitating even more creative mortgages and leveraged ways to own a home. Risky investment vehicles such as mortgaged-backed securities, derivatives, and credit default swaps added another financial dimension to the bubble. Then, when the last person who wanted a house finally got one, the lights went out on the party.
Clearly the situation now is unpleasant for many people. In response, the proponents of big government have taken their cue from the disease establishment. They want to treat the symptoms of the economic bust without regard to what caused the bubble in the first place.
For small government proponents, just as the best cure for having eaten too much is not to eat for awhile, the best cure for a massive debt buildup is not to borrow for awhile. This includes the government as well as the individual.
Big government takes its cue from big medicine and wants to treat symptoms
In the big government camp, there is a lot of scurrying around trying to figure out what to do with the huge debt ball that threatens to roll on top of the economy and squash it. Some advocate the creation of a "bad bank" to buy up all the troubled debt at inflated prices. Others want an end to the mark to market accounting rule under which the books of financial institutions are required to show the true value of their assets on a daily basis. An end to mark to market accounting would allow banks and debt institutions to carry loans on their books as though they were still worth what they were before the borrowers stopped making their payments. The thinking is that if the old debt can be dressed up in some kind of way that makes it look better, it will be easier to create new debt.
The small government camp thinks that it was government intervention and manipulation that caused the housing market to become divorced from sound money policy in the first place. They advocate a return to free market principals, sound money policy, assessment of the principles of risk and reward, and supply and demand, without government or political intervention. For them, it is the manipulative rules and regulations of government attempting to dictate social and economic behavior that are the root causes of the current distortions and bad investments. Bailing out banks, continuing failed Fed policies and strapping the taxpayer with toxic debt will only worsen the pain and punish the innocent.
For Ron Paul, curing a recession means allowing it to take its course by allowing the market value of debt to reflect its true value. This would allow lenders to lose money if the borrowers cannot make their payments, a fundamental principal of free markets. If loans cannot be paid, they will eventually be written off the books at a true value of zero. Institutions that made bad loans to the point where their financial futures are compromised will disappear. The investors they represented will lose their money and realize they made bad investments. Homeowners who bought houses that were overvalued can either pay off their inflated mortgages or they can walk away from their houses. Either way they will learn from their mistakes. As a result of the economic crisis, people will realize the importance of saving money again. Eventually equilibrium will be reached and the economy will be poised to recover, spurred on by a mounting national savings rate.
If Congress wants to be helpful and stimulate demand, it should cut taxes, according to Congressman Paul. Ideally, the income tax should be completely repealed, and the IRS should be dismantled giving everyone a reason to celebrate. Unconstitutional programs and departments should be discontinued, and the wasteful governmental encroachment of the people’s liberty and money should be ended, starting with its massive overseas empire. When the U.S. gives up its desire to rule the world, money dedicated to that purpose could be brought home and would be more than enough to provide funding for the expenses of a small government. Congress should abolish the Federal Reserve and take back its responsibilities to ensure sound money, safe from the manipulations of powerful banking interests.
Free economies have always gone in cycles, following the grand design of nature. When an economy is ready to expand it does so, requiring no government stimulus to get it going. And when it is time for an economy to contract, it will do so no matter how much stimulus is thrown at it.
The stimulus package can only prolong the economic pain
The current stimulus package creates another $6,500 of additional debt burden for every American man, woman and child. That is $26,000 for a family of four. This burden is on top of the $37,000 already owed by every man, woman and child, equating to $148,000 for a family of four. This makes a total of $174,000 extra that the family of four will have to come up with, an amount that is the equivalent of buying another house for many families. This is at a time when people are struggling to pay off their already gargantuan debt for houses, cars and credit cards.
Big government claims the stimulus package is designed to put out the economic fire that threatens to destroy the U.S. economy. In the words of Congressman Paul, big government’s piling of all this extra debt onto its citizen’s backs is simply throwing kerosene on the fire. It will only serve to deepen and lengthen the recession until it officially is declared a depression. So even if Goliath wins the stimulus battle, David will be proven right in time. Unfortunately a lot of destruction will have to go on in the meantime.
Ron Paul, Cures for Our Economic Disease, Texas Straight Talk.
Jack Crooks, An epic battle being waged, Money and Markets.